Bid-Ask Spread

The bid-ask spread is the gap between what buyers are willing to pay (the bid) and what sellers are asking for (the ask). In options trading, this spread represents a direct cost on every trade. When you buy an option, you pay the ask price. When you sell, you receive the bid price. The difference between these two prices is effectively a tax on your trade, paid to market makers who provide liquidity.

The impact of wide spreads is often underestimated. An option with a bid of $1.90 and an ask of $2.10 has a $0.20 spread — that's 10% of the option's value. You lose 10% the moment you enter, and could lose another 10% when you exit. For multi-leg strategies like iron condors (4 legs), this cost multiplies. With a 10% spread per leg, your round-trip execution cost could be 40% or more, meaning the strategy needs to be nearly perfect to generate a profit.

Spreads vary dramatically across stocks and strikes. Highly liquid names like SPY, AAPL, and QQQ often have spreads under 1%. Mid-cap stocks might have 2-5% spreads. Small-cap or low-volume names can have 10-20% spreads or worse. Spreads also widen as you move away from at-the-money strikes and during the first and last 15 minutes of the trading day. Options Pilot's Liquidity pillar measures spread quality, order book depth, and execution cost estimates so you know exactly what you're paying before you trade.